How long can you beat the same drum?

This is the question I was asked recently. I'm waiting to fly now and thought to share some quick thoughts about it.


Indeed, I have been beating the same drum for a couple of months now by keeping saying the market is risky with extreme complacence and is prone to a sharp correction at any time. But the market keeps going up regardless. Naturally I should expect to hear this kind of questioning. I've got it but will I stop feeling the risk of the market now? Not at all. I actually feel more and more of the risk we are facing with each inch higher the market climbs. Yes, my timing is off this time for sure but it does not mean it is useless to keep cautious with this kind of market status. There are few points I can share with you why I'm so "stubbornly" talking bearish now.

• You probably can understand I'm not writing this blog for myself but for friends like you who are interested to hear what I'm thinking about the market and investing ideas. My intention here is not to write what people want to hear but what I honestly think about, especially what the potential risk we may face. That's why you may often find that my talking here is against the mainstay opinions frequently. My 20+ years in the market has taught me a big lesion that herd/mainstay opinions often lead to an opposite result sooner or later. What makes most people feel great and excited is often something that should be avoided.
• Yes, no one can time the market perfectly all the time and I have no crystal ball either. But it does no mean that we cannot spot the area when the market appears topping or overbought when a swift downdraft is highly possible; or vice verse that the market appears to be bottoming or oversold when a powerful rally is coming. That's one of the big motivations for me to talk about such topping or bottoming areas when I see them showing up. Although I cannot precisely time the exact turning point, at least I think it is more helpful than not for many friends out there who have no idea what may be coming and would otherwise blindly chase highs in the extremely overbought condition or run in panic in the extremely oversold condition. 
• One fair question is obviously common: why should one stay sidelines when the market seems expensive but still keeps going up? There is no easy answer to this and it very much depends on each person's ability to manage the risk involved. Maybe I can ask you this way, what is more important for you: safety vs profability? It is natural for everyone in the market that we hope to be able to get all the profit in the market but can avoid all the risk at the same time. Unfortunately, there is no such miracle for anyone, event not for Buffett or Soros! The message I'm trying to convey in the past few weeks is not about the exact topping moment but rather that the risk is increasingly higher with the market keeping going up in the widely euphoric sentiment condition. You may miss the 5% upside opportunity by staying at sidelines but you probably will avoid a 10% downside risk by doing so. If you think you can manage the risk and don't want to miss the potential gains by chasing highs, no one can stop you from doing so. By all means just go ahead. For most folks, I'm still advising be careful now!

Personally here is how I'm approaching this market. As I have alluded to before, even I'm bearish for the market in general, it dose not mean I'm always staying on the short side all the times. Actually I'm still doing a lot of long betting as swing trading. This is especially true for some obvious oversold opportunities we often see in the market, such as the BA trade I just talked about. But I'm doing more shorting indeed in a generally overbought market condition like we are seeing now. I heavily use TA to guide me to spot good candidates for shorting. Recently two good ones I did were the healthcare sector and precious metal stocks. After a very good run to the upside for months, their TA is showing a great deal of tiredness and appears to be ready for a correction. Lucky timing for me with quite good gains by shorting them lately (3-5 times my cost bases)! Although I'm still wrong timing wise by beating the same drum for weeks for the whole market, I can still gain more by being cautiously maneuvering in this crazy market sentiment! When (not if) the final moment finally comes, the market may crash like crazy and the sentiment will suddenly drop like stone. My longer term bearish positions, which are very cheap to set up now, can reward me greatly!